The 2000 Recession Can Tell Us a Lot About Today's US Economy

Some readers have been asking how "Austrian economic analysis held up during
the last recession". Brilliantly, is the answer. It successfully described
the emergence of the American recession and the pattern of rising unemployment
and spending neatly fitted the Austrian explanation for the boom-bust cycle.
Austrianism claimed that the contraction started in the higher stages of production
and then worked its way down the production structure. Figures from the NAPM
(National Association of Purchasing Management) in the middle 2000 gave considerable
support to this view.

The NAPM Index showed that manufacturing was contracting. Moreover, manufacturers
accelerated the liquidation of inventories in April 2000, bringing the Inventories
Index down from 44.2 per cent in March to 39.6 per cent in May 2001. In late
2001 another NAPM report showed that economic activity in the manufacturing
sector had fallen for the 15th consecutive month in October. Leaving no room
for Keynesian Pollyanna's to find a chink of light, it also revealed that the overall
economy had ground to a halt. But what is of the strictest importance about
both NAPM manufacturing findings is that they narrowed the beginning of
the recession down to about the middle of 2000. Well guess who was the
then president?

Now the index registered employment as negative from January 2001. The meaning
of this was brought home when it was reported that 223,000 jobs were lost in
May 2001, the biggest drop in ten years, raising the US April unemployment
rate to 4.5 per cent. This was on top of a loss of 53,000 jobs in April. (Note
the rate at which the jobless increased. As an aside, also note how the ever-so
honourable leftist media blamed Bush for the job losses). Meanwhile, average
hourly earnings rose 0.4 percent in April after a 0.4 percent increase in the
previous month. There was nothing unusual here. The classical economists also
observed that there was a tendency for wages to continue rising in the final
phase of a boom.

Eventually the recession struck at the rest of the economy, including services,
but to a lesser degree. In early May the NAPM revealed that its non-manufacturing
index had dropped three points in April to 47.1. This was the lowest monthly
reading in the survey's four-year history, making it a 14 point fall since
December 2000. What is particularly interesting is that the NAPM survey's indicated
a general contraction. Yet consumer spending actually accelerated during the
recession. How could this be and why didn't the GDP go negative throughout
the recession. According to Tim Kane and Rea Hederman of the Cato Institute

A vigorous public policy response turned the 2001 recession into one of
the mildest downturns in modern history dating back to 1947, the year comprehensive
official statistics were first recorded by the U.S. Bureau of Economic Analysis
(BEA).

But this analysis only holds up if you rely entirely on GDP, which is a net
value approach that ignores spending on intermediate goods. The Austrians tirelessly
point out that what matters is gross spending, not net spending. By ignoring
spending on intermediate goods orthodox economists greatly understate business
spending reducing it to about 33 per cent of the economy when in fact it something
like 66 per cent. The net approach also greatly understates the depths of recessions.
Austrian analysis reveals that during the Clinton recession gross investment
took a massive hit and went into freefall. (It should be noted that intermediate
goods are a part of gross savings).

Then there was the fuss about debt which, like overvalued shares, was not
quite the problem that many commentators predicted it would be. The real problem
was not debt but the process by which massive debts were incurred. (We are
still faced with the same problem today). Unless this problem is fully understood
more recessions, bubbles and market crashes are guaranteed to happen.

The present monetary mess is evidence enough that the lesson of the last recession
was never learnt. This brings to mind Robert McTeer of the Dallas Fed who encouraged
people not to save but to keep on spending. This was the kind of dangerous
Keynesian nonsense that still has some people believing that Japan's problem
is that it saves too much. Unfortunately, the very same nonsense is to be found
in the Australian media.

That the Austrian theory of the so-called business cycle is clearly superior
to any other in existence is, unfortunately, still not widely recognized, and
all but ignored in Australia.

Note: Although Australia's so-called free-marketeers still refuse to
acknowledge the existence of the Austrian school others are taking note of
its insights. For example, the 2001 March BIS meetings for central bankers
(held behind closed doors) had a session in which Austrian analysis, among
others, was used to determine the outlook for the global economy.